By John C. Ardussi, President of Game Mechanics LLC
Price gouging is a pejorative term referring to a situation in which a seller prices goods or commodities much higher than is considered reasonable or fair. This rapid increase in prices occurs after a demand or supply shock: examples include price increases after hurricanes or other natural disasters. In precise, legal usage, it is the name of a crime that applies in some of the United States during civil emergencies.
I am pretty sure that there has never been a civil emergency that required the purchase of a particular outfit or apartment on PlayStation Home. So for the accuracy of terms I request that people not use this term indiscriminately, since it will change the meaning and eventually become less useful. Price gouging requires that the buyer be compelled in such a manner that not purchasing the item will cause suffering or at least a problem.
To dispel this notion of price gouging, let me explain the process we go through when creating, then finally pricing items. I cannot guarantee that this has any relation to other developers, but I imagine they have a process that at least includes some of the same factors.
We have no numbers on how many people are in Home. We have no numbers on how many people buy things in Home. We have no numbers telling us how much people spend in Home. And we have no numbers indicating how much people spend on particular item categories such as clothes, apartments, clubs, furniture and the rest. So in terms of the information that a classical business might have to calculate a good price point, we have no data except what we get based on our own items’ sales.
This leaves us flying blind, basically guessing. We obviously use clues like looking at how other developers have priced items, assuming they have chosen a proper price point. But that is the blind leading the blind. And worse, if they just went off a cliff, we might accidentally follow them.
Let’s start at the beginning to see how items develop from day one. My partner (Mike Gehri) and I, who run Game Mechanics, talk about items from a list I have of great ideas. The items are all great, but we have to pick the ones we will do, since we have limited resources. When we first started, we created items that we ourselves would buy, since we had zero data to work with. As we have seen numbers come in, we have adjusted our selection process to include what we see as buyer preferences that we did not anticipate.
One of the experiments we did was to release canvas chairs at $0.99 and personalized versions at $1.99. If price was important, then we would have seen a large number of the plain chairs sell. Honestly, we sold very, very few of the plain chairs. We sold and are still selling a lot of the personalized chairs. So while it may make sense that lower priced items should sell more, they do not. What sells is functionality.
This is an online truism that developers openly talk about with each other at conventions. The difficult part of online sales is convincing people to buy things. Once convinced, the price is less of a factor. In other words, cutting your price in half will not double your sales. Our experience is that lower prices will tend to lead to lower revenue.
I have no data to back this up, but I imagine there is a point where this fails. For instance, once you raise the price of a pair of shoes so it starts to compare to the price of an apartment, it creates a whole new buying decision. Suddenly you have buyers choosing between items in different categories. I imagine that will affect sales.
One of the rumors flying around is that prices reflect development cost. While it helps quiet the disgruntled forum complainers, for Game Mechanics it is mostly not true. Once an item is created, the cost of development is set aside. The first thing we look at is how it compares in Home to other similar items. Then we compare the functionality of our item to most items in that category. For instance, there are a few couch swings in Home, but since ours actually swings, we thought that added value and priced it a little higher accordingly.
Once the item is priced, we try to see how many units we need to sell to cover the cost of development. If our development cost is higher than our anticipated revenue, we may raise the price slightly, but we rarely have. If it is lower, we so far have not lowered the price since we have to bring in a certain amount of revenue for all the items we are selling. At this point, our overall revenue has fallen far short of our development costs.
I was in an early pitch meeting with the North American Home team in 2010 in Foster City, pitching one of my ideas when I told them that having apartment’s base price be $5 would hurt the platform long term. My belief at the time, and I believe is still true, is that if a base apartment like a Paris Clock Tower is $5, that leaves little wiggle space for items to come up and smaller apartments to go down. To me, a base apartment has the value of a PSN game priced around $9.99. You spend lots of time in it decorating and having friends over. It is the base on which all items sit. The difference between that and a sofa should be more than a few dollars. If this were the case, I think Home developers would be doing better.
Increasing prices is not about gouging, it is about survival. Sony set the pricing standards when there were very few items. Then they sold a ton of them. I know. I worked on a good chunk of those items. Then they walked out and left the place for the 3rd party developers. But several 3rd party developers left. Mass Media and JetSet Games are gone. Those two did not leave for any other reason than they did not think they could make enough money at it to make it worth their time.
There are only two ways to make more money: sell more units or raise the prices. Since we and most other developers are taking advantage of all the marketing opportunities in Home, the logical conclusion is that the only opportunity left is to raise prices. Not because we are greedy, but because we want to keep making things for Home.
I am not saying here that I think no one has charged too much for a space or an item. I absolutely look at spaces and wonder what the developers was thinking in terms of price. But since I have been told we all get the same data, they are guessing along with us, so I have some sympathy for them.
The goal is to strike the happy medium so that one day we are actually making money developing for Home. We will not be stopping development in Home for now, because people like what we are doing and we enjoy making items for Home. This is not a business decision, but a personal one. We like Home, so we are staying.
But to describe us and other developers as greedy or gouging is 180 degrees from the truth. Currently we are subsidizing the purchase of our items. Not every item loses money. Some even do extremely well. But overall we are not yet back to even.
The reason we like to stick with Home has a lot to do with the fans of our work. These people go off and write articles, make movies, chat up our items to the point we feel we have a lot to live up to. It is really fun to work late nights and weekends when you have that wind at your back.
And do not worry about us going under, we are doing great. The work Game Mechanics has done to pay the bills has been for a NASCAR team, ESPN, a car kit company Factory Five, and we just signed a deal with Verizon. That is what keeps us out of our parents’ basement. What is interesting is that we hear the same message whether it is from ESPN or the Home forums – You should charge less. Very rarely do we hear the message – You should charge more. I think Game Mechanics is in a good place for pricing all our work. My parents think so, too.